You can give to charities and gain estate tax benefits in the process. Let’s look at the estate tax first of all so that you know how to determine whether or not you are actually going to be exposed to the tax.
Most people are not going to have to pay the estate tax because today there is a relatively high exclusion. After the enactment of the American Taxpayer Relief Act of 2012, permanent estate tax parameters were put into place.
The estate tax exclusion was set at $5 million for the 2011 calendar year, and this is the basis of the exclusion going forward. It is adjusted annually for inflation, and in 2013 the exact amount of the federal estate tax exclusion is $5.25 million.
You should understand the fact that there is also a gift tax, and it is unified with the estate tax. As a result this $5.25 million exclusion applies to gifts that you have given throughout your lifetime as well as the taxable value of your estate at death. To say it another way, the value of property you transfer during your lifetime and at death cannot exceed the exclusion.
The maximum rate of the unified gift/estate tax is 40%.
If you have assets that do indeed exceed $5.25 million in value you may want to consider how charitable giving could provide you with estate tax efficiency.
Methods of Giving
Very simply and directly, any money that you give away is going to reduce the taxable value of your estate. However, if you give the money to a non-charitable recipient you do have to contend with the gift tax.
On the other hand, gifts that you give to qualified charities are not subject to the gift tax. So you are reducing the value of your estate as you make tax-free donations. Plus, you get a charitable deduction.
There are a number of different ways to make charitable giving a part of your estate plan aside from direct lifetime gifting. One possibility is the donor advised fund.
With these funds you can request that grants be endowed to multiple different nonprofit entities. However, you only deal with the fund, and through a single contribution you could support several charities of your choosing.
The administrative costs are low, and you have a simple accounting relationship with one entity.
From a tax perspective you get a charitable deduction for the year within which the contribution was made. Your taxable estate is reduced by the value of the contribution. And, a donation of appreciated securities would not be subject to capital gains taxation when liquidated by the charity.
Another option would be the creation of a private foundation. You don’t have to be a billionaire to do so, and this would be something to discuss with your estate planning attorney.
There are also charitable trusts that can be a good choice for many individuals who are seeking tax efficiency, especially those who are in possession of securities that have appreciated considerably or securities that are likely to appreciate considerably.
Author, President and Founding Attorney
Parman & Easterday